U.S. producer prices post first drop in seven months

U.S. producer prices fell in March for the first time in seven months, weighed down by a drop in the cost of services and energy products, but the

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largest annual increase in five years suggested inflation was rising.

The Labor Department said on Thursday its producer price index for final demand slipped 0.1 percent last month. That was the first decline since August and followed a 0.3 percent gain in February. Despite last month's dip in prices, the PPI shot up 2.3 percent in the 12 months through March.

That was the biggest gain since March 2012 and followed a 2.2 percent jump February. Economists polled by Reuters had forecast the PPI unchanged in March and rising 2.4 percent from a year ago.

Prices for final demand services fell 0.1 percent, accounting for three quarters of the drop in the PPI in March.

With oil prices rising in recent days and recovering nearly all of March's losses on reports Saudi Arabia wants to extend production cuts enacted in January for another six months, monthly producer prices are likely to resume their upward trend.

Overall domestic price pressures are rising, with most consumer inflation measures now above the Federal Reserve's 2 percent target. The increases reflect in part, an ebb the dollar's rally and strengthening domestic demand.

The dollar has declined 2.8 percent against the currencies of the United States' main trading partners since January and commodity prices have been rising as the global economy firms.